Brexit

What would the innovative and untested customs proposal mean for the UK?

BY Ben Kelly | thescepticisle   /  16 August 2017

The Government has finally offered a little clarity on its objectives for the UK’s customs arrangements with the EU when our EU membership ends on March 29th. This has led to the usual back and forth between scornful Remainers and angry Brexiteers, but setting that aside for a moment, I would argue that at the very least it’s a positive step in the right direction to finally understand what the Government is currently thinking.

The great positive to take from this week’s developments is that there finally seems to be general acceptance of the necessity of a transitional arrangement to bridge the gap between the end of the UK’s EU membership, and the commencement of the legal and political framework that the new UK-EU partnership is based on.

The Government’s first Future Partnership Paper on Customs Arrangements proposes a “temporary customs union” with the EU after March 2019. This would essentially mean a period of shadowing current arrangements; including retaining a common external tariff with EU during the transition, which resolves potential rules of origin issues in the interim.

Brexit headbangers like Farage and Ruth Lea are leading the disgruntled brigade and complaining that it contradicts what Philip Hammond and Liam Fox stated in their joint Sunday Telegraph article, which said categorically that the UK would leave the Customs Union and the Single Market on March 29th 2019.

Essentially, it isn’t a contradiction, because the Paper proposes being in a customs union with the EU, rather than being in the EU Customs Union. This distinction has been the subject of much mockery today from Remainers, but the distinction is necessary for a very important reason that seems to be lost on so many. So, to be absolutely clear; the EU Customs Union has its legal basis in EU Treaties; continued membership of it is therefore not possible for the UK. The EU Customs Union is not for non-EU members.

Before you cite Turkey, the EU and Turkey have a separate agreement signed in 1995. They are in a customs union, but Turkey is not in the EU Customs Union. This separate customs union is limited, creating a common external tariff for the products within the scope of the agreement, and binding EU to the EU acquis in several market areas.

What the Government is proposing, is to shadow the current Customs framework to create a “standstill” period that prevents sudden changes that would adversely effect businesses in the UK and the EU, and create an immediate issue on the Irish border. This is sensible and necessary, and although the EU is being cagey in response, because it is sticking to the negotiation running order, a smooth transition is important for all parties and agreement on this is inevitable.

There has been speculation over whether the UK will be able to negotiate and sign new trade agreements with other countries under this scenario.

It’s actually the Common Commercial Policy that gives the EU Commission exclusive control of the trade policy of member states, which presumably we would not be part of in the interim customs union.

In theory, this could mean we can pursue trade agreements but would not be able to adjust tariffs. David Davis hints at this in yesterday’s City AM when he said that the UK would ‘not bring into force any new agreements which were not consistent with the terms of this interim period’. This isn’t a major issue because regulatory convergence is more important for trade facilitation than tinkering with tariffs; however, there are more important issues hindering new trade agreements.

Crucially, until there is a greater degree of certainty over what the future trade and customs arrangements are actually going to be between the UK and the EU, we cannot possibly get down to serious detail in any new trade negotiations with other countries. It is not clear what level of regulatory compliance the UK will have with the EU, and how ongoing compliance will be maintained, so we can’t discuss such details in negotiations with other countries, nor agree anything that creates divergence with the EU.

Ultimately, each potential trading partner is going to want to know how easy it is going to be to access the European Economic Area from the UK. Until that is crystal clear, our independent trade policy is not going to take off.

I know this is the kind of detail and delay that annoys many Brexiteers, but to them I say this; to make a success of Brexit, a transitional period is critical.

Already the utterly clueless and unhelpful Nigel Farage is crying foul on the supposed “Brexit betrayal” and, again, telling us all what Leave voters did and did not vote for. According to The Sun, a new Cabinet row is erupting as apparently Liam Fox and Boris Johnson now insist that any transition must last no longer than 12 months. This is just an arbitrary timeframe that isn’t based in reality, and Fox and Johnson need to check their ignorance, reel in their egos and keep their mouths shut for a while to give this miserable Government some semblance of functionality and unity.

It’s important to reassure Leave voters, but it’s far more important to reassure businesses concerned about uncertain economic conditions and to prevent a recession by implementing Brexit in a sensible way via a staged secession that phases into our new partnership. As pragmatic Leavers have said until we’re blue in the face, Brexit is a process not an event, and ending EU membership is not like leaving a golf club. There are inherent political and economic risks involved in seceding from such a complex political and legal union. Rejecting a transition period is like trying to leap across a raging river and falling in face first; all I’m asking is that we use the stepping stones to cross safely.

In reality, the debate over whether or not we should have a transitional period is a waste of time because it’s a false choice; there is no choice, we must have a “phased implementation” to the yet to be negotiated new framework for trade and customs. There will be no new customs agreement in place by March 28th 2019, and even if there were, the UK would not be ready to manage new customs barriers by that time.

The proposed temporary customs union provides the necessary time needed for the implementation of technology, IT, infrastructure and trade facilitation measures needed to mitigate the impact of customs formalities. March 2019 is simply not enough time for such a huge challenge. The new IT systems alone are going to be a major project and they cannot be delivered in less than two years.

HMRC’s current IT system ‘Customs Handling of Import and Export Freight’ (CHIEF) is in the process of being replaced with a new system, ‘Customs Declaration Service’ (CDS). This new system will need to process a larger volume of customs declarations, but it’s scheduled to go live on January 2019, a mere two months before the UK’s EU membership ends. This would not be enough time to iron out inevitable issues, and many essential upgrades are due to be phased in between 2019-2020. In any case, it is likely that CDS will not actually be ready by March 2019; HMRC presented evidence to the Treasury Committee in February 2017 that has led to a collapse in confidence in the projected schedule.

As for physical infrastructure, the Channel ports are already struggling with daily traffic of 10,000 HGVs, projected to rise to 16,000. Thus, investment in capacity would be a must even without Brexit. The potential for increased customs declarations, inspections and resultant delays could impact the ports and the surrounding roads. This is why Charlie Elphicke MP recommended investment in the road network approaching Dover in his paper “Ready on Day One”, including widening the M20, building the new Lower Thames Crossing, dualing the M2/A2 up to the Channel ports and building the proposed Stanford West lorry park on the M20. It goes without saying that none of this can be done by March 2019.
Despite the protestations of many campaigners and politicians who concern themselves far too much with the customs union, customs issues can be managed and the successful negotiation and conclusion of a customs cooperation agreement is eminently achievable. But time is needed to conclude said agreement, and to design and implement facilitative new systems and customs processes for the UK-EU border, as well as for businesses to adapt.

The real problem with the Government ideas on customs issues and the Irish border, despite the good news about accepting the need for a transition, is that its suggestions on how to mitigate customs issues are full of wishful thinking and over simplifications. The notion of making businesses pay tariffs and reimbursing them later is dreadful and makes light of the burden this creates for business and the red tape involved. The idea for a “customs partnership” moves towards cake and eating it territory again and seems hard to actually execute.

Above all else, the Government – as well as many commentators – are confusing the Customs Union and the Single Market. To be clear, the Customs Union itself does not lead to “frictionless” trade nor does it abolish border controls. The Single Market, as a single regulatory area, and the four freedoms embodied within it, is the key to trade facilitation. The Single Market is the real reason goods travel so freely across borders in Europe.

This is why I have previously argued for remaining in the European Economic Area, because the EEA Agreement allows us to participate in the Single Market and Articles nine and ten of said agreement go a long way to addressing customs issues and facilitating the mitigation of potential barriers.

For a variety of reasons, the EEA option has been ruled out by the Government. Therefore, the real detail we need is how the Government proposes to replace the Single Market. What system for regulatory equivalence will facilitate trade between the UK and the EU in the future? Without such a system there will be no “frictionless” border. Until we hear further detail on this, we really don’t have any clarity on our future trading relationship or the nature of the UK-EU border.